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23 February 2024

Britain could be in for record-low interest rates

British interest rates have never stood below the current level of two per cent since formation of the Bank of England in 1694, 315 years ago. (AFP)


The Bank of England will today slash interest rates for a third month running, bringing them to their lowest ever levels as Britain readies to join a growing list of nations officially in recession, analysts said.

British interest rates have never stood below the current level of two per cent since formation of the Bank of England in 1694, 315 years ago.

Analysts are forecasting the BoE's nine-member Monetary Policy Committee (MPC) to reduce the central bank's key lending rate by as much as one per cent today at the conclusion of its latest monthly two-day meeting.

"Despite cutting interest rates by another one per cent in December to two per cent, the Monetary Policy Committee has signalled that it has more work to do," said Capital Economics analyst Vicky Redwood.

"Given the further deterioration in the economic outlook, we now think that interest rates will fall all the way to zero, with another one per cent cut at the upcoming meeting getting rates halfway there."

The Bank of England has embarked on a policy of sharp rate-cutting since late last year, in line with the US Federal Reserve and European Central Bank (ECB), as the global economy grapples with its worst period since the 1930s Great Depression.

"With the recession deepening, credit conditions remaining worryingly tight and inflationary pressures retreating sharply, there is intense pressure on the MPC to bring interest rates down sharply further," said Howard Archer, chief Britain economist at IHS Global Insight.

The Bank of England believes that Britain is already in recession although this will be confirmed officially only following publication of economic growth data later this month.

Britain's economy contracted by 0.6 per cent in the three months to September compared with output in the previous quarter, the country's official statistics body said recently. That was the steepest quarterly drop since 1990 but Britain is not officially in recession until it reports two quarters running of negative economic growth, or contraction.

"Indications are that the fourth quarter probably saw markedly sharper contraction probably of around one per cent quarter-on-quarter," said Archer.

"Latest data and survey evidence are extremely weak across the board, be it related to service sector activity, manufacturing, construction, retail sales or business investment. Furthermore, unemployment is picking up at an alarming rate."

Also ahead of today's decision, it has been revealed that British house prices slumped by a record 16.2 per cent in the three months to December 2008.

Britain's leading home loans provider Halifax, which gathered the data, added that prices were set to fall further in 2009.

At two per cent meanwhile, the current level of British interest rates is the lowest since 1951. Such historically-low borrowing costs have weighed heavily on the British pound in recent months, as investors are put off by less attractive yields on savings.

As well as losing much of its value versus the dollar, sterling has also tumbled to stand close to parity with the euro. "What may prevent a more aggressive move is worries about the impact on sterling," said ING senior economist James Knightley.

The European single currency is winning support versus sterling thanks to eurozone borrowing costs standing currently at a more attractive level of 2.5 per cent.

The ECB has cut its main lending rate in three rapid-fire moves since early October, but with the euro-zone economy mired in recession, analysts expect yet another cut on January 15.

The US Federal Reserve has used up its ammunition on monetary policy by slashing its lending rate to virtually zero in December.